How cost effective is drone delivery?

Posted By: STAT Trade Times -
February 22, 2016

Imagine a future where unmanned parcelcopters were to deliver packages to your doorstep.

The transportation of goods between a transport hub to a delivery address, alluded to as being the last mile is arguably the most competitive, challenging and innovative aspect of the supply chain. Given that the relationship between retailers and end users hinges greatly upon last mile delivery.

So much so that drone delivery has often been touted as being among the most innovative supply chain solutions. Since it could help do away with many of the last mile woes by a great degree. And companies like Amazon, DHL, Alibaba and Swiss Post have carried out trial runs using drones.
Statistics provided by The Association for Unmanned Vehicle Systems International (AUVSI) state that commercial UAS shall be integrated into America’s space system and the nascent industry will generate $82 billion annually. It shall also provide more than 100,000 new high paying jobs.
Given the potential that drones espouse Amazon recently updated its Prime Air programme that entails drone delivery. Executives at Google Wing claim they will deliver packages in 2017 via drones. Walmart has asked the Federal Aviation Administration for permission to test drone delivery, and venture capitalists have invested in drone delivery startups.
Despite all the hype, the economics of drones delivering packages does not quite add up. That is if we were to assume a hypothetical scenario where drone delivery clears its regulatory and technological barriers. For when it comes to economic feasibility there are factors like; route density and drop size. Route density is the number of drop offs on a given delivery route while drop-size is the number of parcels per stop.
Since when compared to the conventional delivery truck which on an average makes 120 stops a day, current drone prototypes can carry only one package and requires a return trip to recharge its batteries.
However drones are appealing in scenarios where route density and drop size matter less. Instead, drones only need to beat the cost of private couriers in dense urban areas.
The drones themselves, based on what many e-commerce firms and couriers have are quadcopters that costs around $1,000 to $3,000. Current drone prototypes can carry upto 8 kgs.
Tasha Keeney at investment firm Ark, in her research analysis, makes the case for drone delivery highlighting that 30 deliveries can be made by per drone per day, assuming they can’t operate at night or in bad weather, and each delivery takes roughly half an hour. It would take a fleet of 30,000 to 40,000 drones to move all that merchandise. Give them two batteries each at $200 a pop for a grand total of $80 million in equipment. That’s $150 million in overall capital expenditures, not a prohibitive expense for Amazon, which has billions in free cash flow.
The real savings of drones, of course, is that unlike delivery trucks, they can operate without a human pilot. Keeney works on the assumption that even if the drones are allowed to fly without a human piloting them, there will need to be experienced operators who are keeping an eye on things, or helping with critical moments like landing in your front yard while avoiding the neighbor’s very agitated dog. Let’s say 6,000 drone minders at $50,000 a year, for labor costs of $300 million each year. The analyst adds another $50 million each year for charging costs and fleet maintenance, and $350 million a year to deliver 400 million parcels is roughly 88 cents per package, which Keeney conservatively rounds up to $1 to simplify the comparison.
Keeney’s research shows that stacks up incredibly well when compared to the cost of traditional same day delivery for FedEx, UPS, Google Express, and Amazon. Thus despite the current inability of drones to match the efficiency of a delivery truck’s milk run, the economics of delivering air freight by drone seem compelling in certain scenarios.